Dud tax proves nanny does not know best

The nanny state's experiment with behavioural taxation has failed. Such taxes are causing countless unintended consequences without achieving their original policy aim.

The primary objective of such taxation is to artificially increase the price of a product and thus persuade individuals to consume less of it.

But it is operating under a flawed "government knows best" assumption. The motivation is, in principle, completely illiberal; the government interferes with the rights and freedoms of individuals to make choices about their own consumption. And the efficacy of behavioural taxes is questionable. Although the taxes can change consumer behaviour, they also contribute to perverse and unintended consequences. The taxation of alcohol is the obvious example.

Australia has a complicated and inconsistent form of behavioural tax in the form of an alcohol excise, with three separate taxing regimes: differing rates of excise for different beverage types; the wine equalisation tax; and Customs duty. The GST is applied to retail sales on top of all other taxes.

The nanny statists would have us believe there is an alcohol epidemic in Australia, and a binge-drinking crisis. Yet long-term trends show that Australian alcohol consumption is declining. Australian Bureau of Statistics figures show that per capita consumption has actually fallen more than 20 per cent during the past 40 years. Beer consumption has almost halved during the same period.

Although total consumption has decreased, the consumption of one product category - spirits and ready-to-drink mixed beverages - has moderately increased.

It was perhaps this trend that prompted the Rudd government in 2009 to legislate a 70 per cent increase in the excise imposed on RTDs, a measure that was backed by the nanny state lobby right around the country. We were told the "alcopops" tax would curb heavy binge drinking among young consumers and prevent associated alcohol-related injuries and diseases.

Research shows that significant behavioural taxes may influence moderate drinkers, but not the heavy drinkers that the policy was aimed at. Similarly, such taxes appear to be less effective with young people who have higher disposable incomes. The alcopops tax certainly prompted a rapid decline in consumption of RTDs as they became relatively more expensive.

However, the evidence is that consumers simply substituted privately mixed spirits, white wine and cider. Unsurprisingly, young consumers mixed their own spirits and cocktails to avoid the additional cost of the alcopops tax, allowing them to established their own alcohol to mixture ratios. This potentially increased the amount of alcohol that they consumed overall.

Increasing the price of alcohol also led young people to "preloading", or to consume large volumes of cheaper alcohol at home before going out to a bar or a club.

Perhaps more alarming is the evidence to suggest that the alcopops tax led consumers to substitute illicit drugs such as cannabis and ecstasy for the alcohol. Research conducted by the University of Queensland identified that there was no reduction in the consequences associated with alcohol, such as alcohol-related hospital admission rates.

The effectiveness of behavioural taxation does not improve when applied to other consumer products. In 2011, the Danish government introduced the world's first explicit "fat tax" as a measure to promote healthier lifestyles. It was scrapped after 15 months after research showed Danes simply switched to cheaper brands or went over the border to another country to shop.

The rising cost of tobacco taxes can similarly prompt consumers to switch from legal products to illegal "chop-chop" or counterfeit tobacco products.